DSCR for first time homebuyer?

[Erin Murphy]

I've heard a few lenders say they can't help a first time homebuyer with DSCR.

I’m a first time homebuyer looking to purchase a single family rental property in NJ. I’m self-employed, so most likely won’t be approved conventionally. 

Are there any lenders who allow 20% down DSCR for a first time homebuyer?

If not, do I have any other options at 20% down? 

Thank you!

[Quang Nguyen]

Technically, not all lender would approve a DSCR loan for someone who has not owned their primary but there are some lenders who do lend to FTHB a DSCR loan. Reach out to brokers in your area and see who can help.

[Erik Estrada]

Quote from @Erin Murphy:

I've heard a few lenders say they can't help a first time homebuyer with DSCR.

I’m a first time homebuyer looking to purchase a single family rental property in NJ. I’m self-employed, so most likely won’t be approved conventionally. 

Are there any lenders who allow 20% down DSCR for a first time homebuyer?

If not, do I have any other options at 20% down? 

Thank you!

You can finance an investment property as a first time buyer with a DSCR loan. We just need to verify that you have lived somewhere else for the past 12 months. Lenders will want to verify this with monthly rental lease payments, utility bill, or a LOE from a relative if you live rent free.

[Robin Simon]

Quote from @Erin Murphy:

I've heard a few lenders say they can't help a first time homebuyer with DSCR.

I’m a first time homebuyer looking to purchase a single family rental property in NJ. I’m self-employed, so most likely won’t be approved conventionally. 

Are there any lenders who allow 20% down DSCR for a first time homebuyer?

If not, do I have any other options at 20% down? 

Thank you!

This is an area that is certainly tightening up lately - almost more so as a protection against fraud (borrowers that can't qualify for a owner-occ conventional loan so they pretend to buy an investment property to get a home), but also just risk in general. So the "story" of why you are buying a SFR rental but also renting yourself should be very clear in a Letter of Explanation.

However, these cases can be looked at generally - do you have other investment experience - or is this first foray into real estate completely?  Definitions can vary and be fuzzy lender to lender, program to program, and differ between "first time homebuyer" and "first time investor"

[Brian Fung]

Quote from @Erin Murphy:

I've heard a few lenders say they can't help a first time homebuyer with DSCR.

I’m a first time homebuyer looking to purchase a single family rental property in NJ. I’m self-employed, so most likely won’t be approved conventionally. 

Are there any lenders who allow 20% down DSCR for a first time homebuyer?

If not, do I have any other options at 20% down? 

Thank you!

Aloha @Erin Murphy, 

When it comes to DSCR financing, there are actually a lot of options for you as a first time investor. The most important part of your borrower profile when it comes to DSCR is your credit score. Here's a good rule of thumb regarding how lenders feel about credit scores for DSCR using our school analogies:

- 680 (B-)
- 700 (B)
- 720 (A-)
- 740 (A)
- 760+ (A+)

Every 20 points in either direction will increase or decrease your rate. 
Other items to think about would be your hold time. The longer the pre-payment penalty you select, the better your rate will be. A lot of people think that rates are going to drop in the near future so they opt for lower prepayment penalties. 

While that may be true, take into account the total cost to refinance because it's not just rates that have to drop to make it make sense. When you refinance for a lower rate, you'll need to pay all of your closing fees again (title, escrow, insurance, origination fees, processing fees, etc). Just because rates drop by 1 or 2% doesn't mean that it's a good decision to refinance. You need to do the math. If you don't do it yourself, make sure you have mentors or team members that will help you through these decisions. 

Either way, Good Luck! Aloha. 

[Jacob Sherman]

Are you able to go bank statement program ? Lets connect and discuss . Do you currently rent ? 

[Derek Brickley]

Hey Erin!

Similar to what others have said, it is definitely a possibility as a first-time homebuyer.  We would need to verify primary residence payment history (so if you're renting we would get that). 

[Stacy Raskin]

There are lenders that will do DSCR loans for first time home buyers but there are less lenders willing to do it. The lender will usually require a letter of explanation as to why you're buying an investment property instead of a primary especially if near where you live.

In case helpful, more info on DSCR loans:

DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to connect to discuss further. 

[Nicholas L.]

@Erin Murphy

just to clarify - it seems like you're saying you want to purchase a rental property that you will not occupy with a DSCR loan. is that correct?

it seems like this should be possible, although you might get worse terms. some DSCR lenders will qualify you by the number of completed projects.

with that said though - i'd figure out how to house hack first before dropping 20-25% on a rental.  call lenders until you find one that will work with you.  and if you have to wait 6 months or a year or whatever - do that.  don't buy a random rental and set yourself back just to have bought.

[Robin Simon]

Quote from @Brian Fung:

Quote from @Erin Murphy:

I've heard a few lenders say they can't help a first time homebuyer with DSCR.

I’m a first time homebuyer looking to purchase a single family rental property in NJ. I’m self-employed, so most likely won’t be approved conventionally. 

Are there any lenders who allow 20% down DSCR for a first time homebuyer?

If not, do I have any other options at 20% down? 

Thank you!

Aloha @Erin Murphy, 

When it comes to DSCR financing, there are actually a lot of options for you as a first time investor. The most important part of your borrower profile when it comes to DSCR is your credit score. Here's a good rule of thumb regarding how lenders feel about credit scores for DSCR using our school analogies:

- 680 (B-)
- 700 (B)
- 720 (A-)
- 740 (A)
- 760+ (A+)

Every 20 points in either direction will increase or decrease your rate. 
Other items to think about would be your hold time. The longer the pre-payment penalty you select, the better your rate will be. A lot of people think that rates are going to drop in the near future so they opt for lower prepayment penalties. 

While that may be true, take into account the total cost to refinance because it's not just rates that have to drop to make it make sense. When you refinance for a lower rate, you'll need to pay all of your closing fees again (title, escrow, insurance, origination fees, processing fees, etc). Just because rates drop by 1 or 2% doesn't mean that it's a good decision to refinance. You need to do the math. If you don't do it yourself, make sure you have mentors or team members that will help you through these decisions. 

Either way, Good Luck! Aloha. 

 important that there is often a distinction (however vague) between first time "investor" and first time "homebuyer" - always have to confirm if/what the difference in program eligibility is

[Wale Lawal]

@Erin Murphy

If you're buying a home for the first time and make your money through self-employment, you have many ways to get a loan. You can look into Non-Qualified Mortgage (NQM) lenders, portfolio lenders, private lenders, loans that need different paperwork, seller financing, and FHA or VA loans. Non-QM lenders might look at your bank statements, how money flows in and out, and what assets you have instead of how you usually prove income. Portfolio loans can be more flexible on their rules, while private lenders or hard money lenders might give loans to self-employed people for houses meant as investments. Loans that use bank statements or say your income without typical proof might cost more in interest and have tougher rules.

It's key to look around and compare what's out there to find the right fit for how you make money and your goals in buying a house. Think about working with a mortgage broker who knows a lot about unusual loan options and can guide you through it.

Good luck!

[Dave Skow]

@Erin Murphy- thanks ...before resorting to using a DSCR loan - I would try to get approved for a conventional loan .....terms are likely better ....if you already have tried this - most DSCR loan lenders will want to see previous ownership history

[Carlos Valencia]

Hello Erin, 

There are some lenders that allow you to use DSCR for first time home buyers but as investment property. The lenders that offer DSCR to first time home buyers will be a bit more expensive and require a higher down payment approximately 40%-30% down payment. If your self employed have you looked into bank statement loan programs? You may qualify by using bank statement program as that program uses all your business deposits to calculate your income. If you have huge deposits from your business this can be a solution for you.

@Albert Bui @Matthew Kwan

[Gabriel Fung]

Would also add that as a first time home buyer, recognize that a DSCR comes with penalties if you pay early. If you are 100% sure you will not pay anything down early, then DSCR could be a good option. I also think DSCR comes with a higher interest rate of 1%.

[Brittany Minocchi]

Hey Erin! 

Lots of good responses here already, but I'll add my $0.02 - it's definitely possible to get a DSCR loan as a first time homebuyer, but you'll be limited on options at 80%. I think I may know of one lender who would allow this, and your rate will be higher than if you could make 75% work. Feel free to reach out if you have questions or would like to discuss!